LAS VEGAS -

Perhaps the 2016 J.D. Power Automotive Summit poured a bit of cold water on things just as the festivities in Las Vegas cranked up ahead of the NADA Convention & Expo.

J.D. Power cautioned the industry on Thursday that the U.S. auto market must adopt a more “disciplined” approach to maintain long-term health for the industry.

J.D. Power also warned dealers and other leaders that incentive spending on new vehicles has risen rapidly in the past year and is trending toward recession-era levels for the industry as a whole and has already exceeded recession-era levels on cars.

The analysis found that while overall new-vehicle retail sales are expected to grow by 300,000 to 14.5 million units this year, the growth is being delivered through actions that pose “meaningful” risks to the long-term health of the industry. J.D. Power indicated those actions include:

—Elevated incentive spending
—Increased use of extended loan terms
—Rising loan-to-value ratios
—Record levels of leasing

“Overall, auto sales figures continue to post strong results, but when you peel back just one layer beneath the surface, some worrisome trends are taking hold,” said Thomas King, vice president of the Power Information Network at J.D. Power.

“Chief among the trends is the fact that first quarter sales incentives averaged 9.6 percent of MSRP, a 70 basis-point increase from last year and are trending toward levels observed at the height of the recession,” King continued.

“The increased spending, which is due primarily to manufacturers trying to offset a shift in demand from cars to trucks and SUVs, has the potential to reduce future resale value,” he went on to say. “Significant declines in the value of used cars would disrupt consumers’ ability to buy new vehicles (due to lower trade-in values), while vehicle manufacturers and lenders would have to deal with exposure on their lease portfolios (if off-lease vehicles fail to achieve their expected resale value).”  

King noted that an immediate and significant reduction of incentives on new cars is required, but that means manufacturers will have to reduce vehicle production levels. While J.D. Power noticed that many manufacturers have already made significant adjustments to their production schedules, analysts pointed out the scale of the shift away from cars toward trucks and SUVs is such that further, more significant changes are required.

The J.D. Power briefing mentioned four other key findings. Data is for the first quarter of this compared with the first quarter of last year, unless otherwise noted.

—Overall sales growth projected through 2017: In 2015, 14.2 million retail sales were achieved. That figure is projected to grow to 14.5 million in 2016 and 14.7 million in 2017.

—Rising incentives are major concern: Industry-wide, incentives are averaging 9.6 percent of MSRP and are just 150 basis points shy of the peak level reached at the height of the recession.

—The industry’s average incentives mask a significant deviation between spending on cars versus trucks: Spending on cars has reached 12.3 percent of MSRP, well above peak recession levels, while spending on trucks has remained stable at 8.2 percent.

—Long-term loans and leases on the rise: The percentage of loans in the 84 months and longer range is now 5.4 percent of total sales, up 140 basis points from 2015. Likewise, the percentage of vehicles that are leased is now 31.4 percent, up 360 basis points from 2015.

—Buyer credit scores declining: The proportion of new-vehicle buyers with FICO scores below 650 has increased 40 basis points from 2015 with a total of 17.6 percent of all buyers now falling into that category.